GBPEUR/GBPUSD

The Pound fell against the Euro and the Dollar yesterday, after the minutes from the Bank of England's November policy meeting showed that policy makers were split three ways on whether to extend the quantitative easing plan and discussed cutting the deposit rate on reserves. The UK currency declined against the Euro for the first time in four days, falling to a low of 1.1180.

The majority of the nine member monetary policy committee recommended a £25 billion increase in asset purchases, while the chief economist Spencer Dale favoured no change and David Miles sought a £40 billion expansion. Policy makers unanimously kept the benchmark interest rate at a record low of 0.5% on November 5th.

The minutes said that "a reduction in the rate of remuneration relative to bank rate on a proportion of commercial bank reserves would bear down on short-term market rates and could ease monetary conditions further." The committee "agreed that it might be a useful policy toll in some circumstances, and therefore should be available in future."

The decision was the first three way split since August 2008, before the collapse of Lehman Brothers Holdings Inc exacerbated the economic crisis. The MPC has adopted a policy of cohesion over the past couple of months but as the existing plan drew to a close in November, policy makers have broken rank and are clearly swimming in different directions.

A change in the deposit rate would expand the options available to the Bank of England, as they desperately try to pull the economy out of its longest recession on record. Alan Clarke, an economist at BNP Paribas SA, said that "it's very much a case of keeping their options open. These minutes are saying there's arguments in both directions, and it's going to be very data-dependent in the next three months."

The Pound was trading above $1.6800 versus the Dollar prior to the report, but slipped back through the course of the day, amid speculation that policy makers may extend quantitative easing beyond the current £200 billion. Spencer Dale advocated that an increase in bond purchases posed an increased risk to inflation, and "might result in unwarranted increases in some asset prices that could prove costly to rectify."

David Miles argument for a more aggressive increase was that it would "provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply." Policy makers have increased their forecasts for inflation and economic growth over the past month but the Governor Mervyn King said last week that he has an "open mind" about expanding asset purchases further.

The central bank's projections for the next two years show inflation approaching the 2% target even if the bank starts to increase borrowing costs next year. The Pound posted its biggest decline in over a week against the Euro and may continue to lose ground, as investors lack any real direction on the prospects for additional stimulus.

Peter Frank, a currency strategist at Societe Generale SA, said that "it's very inconclusive. The two camps don't seem to be agreeing. We're coming to the end of the quantitative easing process and people are worrying over how the inflation risk plays out ahead." The Pound weakened almost 1% in value against the Euro in London and we talked about the benefits of a stop order in yesterday's Daily Insight.

EUR/USD

The Dollar declined against the Euro yesterday amid a host of economic data and comments from the Federal Reserve Bank of St Louis President James Bullard, who said that past experience indicates that policy makers may not start to raise interest rates until early 2012. The U.S currency also came under renewed selling pressure, after consumer prices increased just 0.3% and housing starts unexpectedly plunged 11%.

In a speech in St Louis yesterday, Bullard said that "if you look at the last two recessions, in each case the FOMC waited two and half to three years before we started out tightening campaign. If we tool that a benchmark, that would put us in the first half of 2012." Bullard also added that in the debate on when to tighten policy that policy makers would be careful not to create "asset bubbles" by keep rates "too low for too long."

The FOMC reiterated on November 4th that they will keep interest rates near zero for "an extended period" while saying policy will stay unchanged, as long as inflation expectations are stable and unemployment fails to decline. The Dollar dropped 0.5% to $1.4951 against the Euro, while U.S stocks also declined.

In terms of economic data, U.S consumer prices held at a pace that supports the Fed's view of tame inflation. So-called core prices increased 0.3%, compared to 0.2% in September, after unemployment increased at the fastest pace in 26-years and wages were down 5.2% from a year earlier in September. Elsewhere, builders unexpectedly broke ground on fewer new homes, as starts fell to an annual rate of 529,000, the lowest level since April.

Data Released 19th November

U.K 09:30 PSNBR (October)

U.K 09:30 Retail Sales (October)

U.S 13:30 Initial Jobless Claims (w/e 14th November)

U.S 15:00 Leading Indicators (October)

U.S 15:00 Philly Fed Business Survey (November)

written by Adam Solomon

Labels: daily-insight